What are the chances of a retirement raid when 225,000 savers took their pension funds out last year?

Although pension savers have more options for accessing their retirement funds, making the wrong choice could have negative consequences

According to research, over 225,000 retirees depleted their pension funds last year, possibly jeopardizing their retirement.

Ten years have passed since pension freedoms were implemented, allowing savers to access their pension fund however they see fit.

However, research from the Pensions Policy Institute (PPI) indicates that some people may be regrettably taking money out of their hard-earned savings without taking the long-term effects on their wealth into account.

Over 450,000 pension pots were accessed for the first time between October 2023 and March 2024, according to the analysis.

As a result of the low uptake of guaranteed income options, 51% of these were fully withdrawn as cash, while only 10% were used to buy an annuity.

According to data from the Pensions and Lifetime Savings Association (PLSA), the annual cost of a comfortable retirement is £43,100. Experts caution that individuals who are accessing retirement savings need greater awareness and guidance.

"It is becoming more and more crucial to assist savers in making sustainable decisions as defined contribution pensions take over as the main source of private retirement income," stated Mariana Garcia Requejo, senior policy researcher at the PPI.

How are pensions being accessed by people?

Prior to April 2016, the primary retirement options were to enter drawdown or buy an annuity.

The introduction of pension freedoms by then-chancellor George Osborne, however, has given savers more flexibility in how they access their pension funds.

As a result, even though annuity rates have recently reached all-time highs, fewer people have bought them.

A retiree could theoretically take all of their pension as cash, but according to the PPI report, small pots are more likely to be taken as cash.

Two-thirds of complete cash withdrawals came from pots with less than £10,000 in value.

The dangers of stealing from your pension fund.

It is not surprising that people want to access their pension funds given the high cost of retirement and ongoing expenses.

However, if savers treat everything as cash, the PPI cautions that they might be making isolated, short-term decisions without taking into account the long-term effects of possibly running out of money in retirement.

Tax risks also exist because, even though you can withdraw 25% tax-free, subsequent withdrawals are taxable and may even raise your tax threshold.

Without proper guidance, many retirees are making difficult, irrevocable financial decisions, according to Anita Wright, a chartered financial planner with the advisory firm Bolton James.

Although the allure of instant liquidity is reasonable, especially when living expenses or financial uncertainty are on the rise, doing so may lead to unforeseen tax obligations and the early depletion of retirement funds, the speaker stated.

More importantly, it shows a change in attitudes, with pensions no longer being viewed as surefire sources of lifetime income but rather as flexible savings accounts that can be accessed whenever needed to finance non-essential or discretionary expenses. This is different from the main goal of a pension, which is to replace earned income when one's employment ends in later life.

The PPI also cautions that many savers might make the mistake of continuing to invest in accumulation strategies instead of modifying their assets and taking withdrawals in accordance with a retirement plan, in addition to the risk of cashing out.

This suggests that your pension portfolio may be taking on excessive risk, which could reduce your retirement income.

Fairview Financial Management director Ross Lacey stated that there are frequently misunderstandings regarding what will happen to the money if it is left in the pension.

According to him, this makes people want to take their pension and deposit it in the bank. They have thus essentially gone from something that was tax-efficiently increasing over time to money that will remain in their bank account, earning very little, and potentially subject to taxes. Obtaining expert advice is frequently a wise investment because pensions vary greatly in terms of features, expenses, investment options, withdrawal methods, and death benefits.

According to Patrick Coyne, interim director of policy and public affairs at The Pensions Regulator, workplace savings regulations have made it easier for people to begin saving for a pension, but those who want to access the pot after retirement don't have enough assistance.

According to him, the Pension Schemes Bill ought to include a guided retirement duty in order to offer goods and services that are appropriate for various types of savers.

"Automatic enrollment created a nation of savers," he said. The transition from a savings system to a pensions system necessitates a retirement "sat-nav" that streamlines options and enables savers to make well-informed decisions.

"Savers may have to work longer hours or find themselves short on cash when they ought to be enjoying their later years if they don't receive the proper support.